Persistent inflation is killing the Democratic Party:
But here's a question: Why is inflation such an intense issue? In round numbers, prices have gone up 20% since the start of the pandemic and wages have also gone up 20%. For most of us it's a wash.
But that's not how most people see it. They react sharply to higher prices but seem to practically forget about wage increases. Why? I'm honestly not sure, but I can toss out a few possibilities:
- Prices are in people's faces all the time. The price to fill up a tank of gas, for example, hits you every week or so. Wage increases come once a year and are buried in a pay stub.
- People overreact to the small number of items that have gone up the most. So they vaguely think that prices have doubled because they were shocked at the price of eggs.
- Wage increases are viewed as a reward for hard work, not as something designed to keep up with inflation. So they "don't count."
- For some reason, people remember prices but don't remember their own earnings. My grandfather once complained that roasting chickens were really expensive these days. They used to cost a dollar. "Sure," my mother told him, "and back then you earned $3,000 a year." He'd sort of forgotten that.
- Price inflation, even if on average it's the same as wage inflation, still forces you to cut back on certain items. This is a pain in the ass and probably a source of family irritation.
- The media reports price inflation constantly. They never report wage inflation.
What else?
The US had a long period of very low and stable inflation. Lots of Americans were used to relatively stable prices, in contrast for example a person raised in Argentina. This change, therefore, is more impactful emotionally for many Americans than the math, alone, might indicate.
What else? Well, there's this:
"In round numbers, prices have gone up 20% since the start of the pandemic and wages have also gone up 20%. For most people it's a wash."
That's the worst bogus arithmetic I've ever seen Kevin post. "Up 20%" is an average. It's how much prices have gone up *on average* and it's how much wages have gone up *on average.* Well, here's a news flash--half of the sample is below average.
And don't bother correcting me about the difference between mean and median.
First of all, I know. Second of all, if the average is up 20% then MORE than half the sample are up LESS than 20%--i.e., losing ground to inflation.
So out of however many wage earners you're addressing, there a are millions of them losing ground to inflation. MANY millions of them.
For about a hundred million Americans, it's NOT a wash. That's what else!
My company gave 2-4% raises this year. I don't know of anyone among my friends and family (and coworkers) whose wages have gone up anywhere near 20% over the last few years (obviously excluding promotions). That number just sounds crazy to me. Obviously it's reality for a lot of people out there, but yeah, definitely not for a huge chunk of the population.
OK, but this doesn't explain the extreme negativity. I'm not trying to single you out, but this year inflation will almost certainly be under 4% and might be around 3%. So the people at your company will net around 0%. That doesn't sound bad.
I guess the biggest wage increases have, on average, gone to the lowest income people. Which means the middle class, on average, probably lost a small amount.
The big inflation increases were because covid disrupted things so much and there has been more on-shoring. But that is over. Most people think future inflation will be around 3%. So as far as I'm concerned the crisis is over. We will have more disruptions and more problems, but 8% inflation probably won't be one of them.
It would be nice if everyone came out ahead in the past 3+ years, but we had a massive disruption. Things take time to readjust and it looks like they have. And all the data says most people think they are doing well and it is other people doing poorly. So, to everyone claiming this is still one of the biggest problems we face, why should we act like this is an ongoing crisis?
I agree that it seems as if the wage increases went mostly to lower-end workers, except for AI developers. If the polls are of registered voters, who I think also are more likely to be above average, that means the poll results will be more negative.
A few years back when the Left was campaigning for a minimum wage of $15/hr that seemed impossibly high outside a few places like NYC. Now it's unusual to hear of a job paying less to new hires, and some "low wage" places are offering even a bit over that.
0 doesn't mean you are in a better place than 4 years ago.
And, of course, I never said otherwise.
The answer to the puzzle is:
1- wage increases compound. 2-4% a year is roughly 12% over the time period for people who stayed in their same job.
2- this 2-4% a year ignores all the people who changed jobs and took a higher paying job.
20% is pretty easy to imagine given the massive hiring and job changes that occurred in 2021/2022.
Yep, yep, and yep.
I really want to see the data behind the average wage increase. It certainly isn't showing up in my (or any of my friends', colleagues', acquaintances', etc.) wages to the tune of 20% over the last 4 years. People who have stayed in the same jobs since then have received 3% per year if they're lucky, which compounds to a little more than 12% over 4 years.
There's also the matter of which things are increasing. We know that rent and mortgage payments are eating up more of people's income, by percentage, than 4 years ago (with the percentage who are rent-burdened at an all-time high this year). The Case-Shiller index (which is imperfect but just as an example) has increased by 50% since January 2019. Meanwhile, things like gasoline and some consumer goods have actually decreased in price. Add all this up and sure, "on average" price inflation is 20%.
Going back to the wage data, HOW are we determining 20% increase? Is it an average of the size of the increase that everybody has received, or is it total wages paid to non-supervisory workers (for example), or something else? If it's an average of everybody's increases, well, if the lowest-end of the wage scale has seen their wages increase by 30% but those in the middle have only seen 10%, that has implications for who is hurt (or helped) by wage inflation vs. price inflation, and with the aggregate look that Kevin is taking (because it supports his "inflation isn't a big deal" narrative/personal experience) it's impossible to know whether that's "most people."
But on the scale of the (price) inflation that we had over the past 3 years, if half of everybody is falling behind (or worse, if the average being used here is a mean and not the median) that's REALLY BAD for them, for the country, and for the in-power party (which is double plus ungood for everybody's interests). So yeah, it's really simple why inflation is such a big issue.
It's also especially obvious that it mostly went straight to goosing corporate profits at everybody else's expense (except execs and stockholders, as demonstrated by Kevin's chart in his previous post).
If you haven't bought a house recently and are living in one with a fixed rate mortgage or no mortgage you aren't paying more except maybe for the escrow portion.
Yes, and?
Averages are always bogus arithmetic because 50% of the sample is always below average?
Well ok then.
Averages are always bogus? Or only if they dont portray the right narrative?
People are stupid, look at that chart, in 2009 they trusted Republicans more than Democrats on the economy! The only time Democrats are more trusted is the end of the Bush era, then immediately the majority go back to thinking the party that just destroyed the economy is better on the economy!
I’m 57 years old, my entire lifetime has been Republicans screw up the economy and then Democrats fix it and get blamed for it.
I'm 55 and the same thing. This will sound like a conspiracy, but I do think the heads of media companies want Rs in power for tax cuts. (And all the media want TFG back at any cost.)
Yeah, I get that people are upset about inflation, but what do they imagine the Republicans are going to do about it? Pretty sure massive tax cuts for the wealthy isn't going to drive down prices.
ColBatGuano + ∞
Economists and pre-economists have pointed out for a very long time that people are much more unhappy at perceived losses than they are happy at perceived gains. I think one of the Bernoulis was the first to point this out in the 1700s.
Most of the behavioral studies seem to show that, say, a $100 loss causes unhappiness equivalent to the happiness from a $200 gain, i.e. a two-to-one ratio of losses being more powerful emotionally than gains.
I mostly agree, but I think the ratio is more like 3 to 1 rather than 2 to 1. And that's not just monetary loss/gain. It's pretty much all negative stimuli vs all positive stimuli
There's a really good journal article about this by Roy Baumeister et al called "Bad is Stronger Than Good"
Could we compromise and say 2.718 to 1?
Ooooh, nice reference!
Well played!
e to 1, 4 the win! (Sorry, just needed my moment of geekery.)
In addition to there being a significant number of people losing to inflation as noted above, there is also a lag before wages catch up. So, people experience a short-term decline in purchasing power. Plus, people just generally do not like change and uncertainty which a spike in inflation brings. People like to complain so you don’t hear from the people with fixed rate mortgages locked in before 2020 who are making out like bandits.
Absolutely nobody other than a few trained economists think about wage inflation as something keeping up with cost inflation. Most people judge their well-being by whether they are getting ahead and look for signs of that. If the weekly gas fill-up goes from $50 to $75 it doesn't matter much if wages are "keeping up". Most people are constantly thinking "if gas prices drop $1/gallon I can afford that $899 95-inch TV at Costco and see the Kardashians and college football that much more clearly." If wages just keep up, the big TV they thought they had a shot at is still out of reach. So it's a psychology of money thing, I think, like loss aversion.
It could be that a lot of people are perfectly aware that they're making more money than they were 3-4 years ago, but are pissed that it doesn't feel like they've advanced economically because inflation ate most of it up. I get that. What's frustrating is that they don't know who to blame for it, however, and are under the impression that an effective adminstration would somehow engineer *deflation* to bring things back down to where they were pre-pandemic.
That would of course require a major depression and them losing their jobs entirely, but the average voter doesn't really know how to game that out.
Like the comment above by wvmcl2, I was gonna point out the “loss aversion” phenomena.
Plus, I do think there’s something to do the idea that a wage increase is something “I deserve, and it’s about damn time”… while price increases are something some OTHER greedy person, not me, is taking from me.
Plus, I personally see people fuss over the tiniest of sums, trying to save small amounts on things, while simultaneously making huge and (seemingly to me) irresponsible purchases, like a new car every few years.
Penny wise, pound foolish?
Plus, everyone is a little bit dumb and inconsistent and likes to grump about things they know very little about. Perhaps they think it makes them seem informed and engaged to the question asker. (Much like the average person’s political opinions).
Are people really concerned about inflation? The average of monthly inflation from 1983 to the end of 2020 was 3.0%. In the University of Michigan poll in August the average expected inflation for the next year was 3.5%. This not a major difference. As I mentioned before, there are several polls that show that on average people think that their own finances are doing well, so there seems to have been no groundswell of people suddenly (since January 2021) not being able to keep up because of inflation.
The media always exaggerate inflation and they can always find people to interview who are dissatisfied because their wages have not kept up, or who just don't understand how inflation works. Some of these people show up in every comment section. Of course the rightist propaganda machine cranks out misinformation on inflation as on every subject, and the MSM have op-ed writers and editorialists who are right or center-right and will support the right's claims. If you're a Republican and a Democrat is President it's your duty to complain about the economy. This duty has become more imperative as polarization has increased.
People are pretty dumb about almost everything. This is not an insult. It is our lot in life. That is why we have scientists and economists and engineers. To figure things out.
Also, people like to focus on money. Personally, I think life is too short to worry about this but others do. My wife goes nuts over coupons. Many people think that finding and using coupons or finding a better deal is a competitive sport. I tend to buy the item I want and don’t look at the price. If my wife says she can get it cheaper elsewhere I offer to pay her difference but it just makes her mad.
Inflation hits the pockets of the folks who are most likely to vote: Retirees on pensions, 401Ks, and Social Security. They're not going to see their incomes rise with the prices. They're the few who actually want deflation, sort of like the massively aging demographic of Japan, right?
If you want to help them during periods of high inflation (or just in general to support the folks whose income will never keep up with real prices), pass a bill to remove social security and similar income from being taxable.
Except don’t people on social security get COLAs that are tied to inflation?
While it's tied to CPI-W, it's only adjusted once a year as a backwards look of the previous federal budget year. SS recipients had to scrimp in 2021 and especially in 2022 before catching up, and depending on their primary costs, they'd have to adjust their lifestyle and may not have caught up in the current year.
SS COLA:
2021 5.9%
2022 8.7%
So, whereas actual average inflation in 2022 was 8.7%, during the year their SS had only been adjusted to 5.9%. If you're on the lower end of the income level, that's a big gap.
Whq
Another point is the propaganda and business networks keep repeating the mantra, like immigration, inflation has been a real issue (though the impact can be exaggerated) but nowadays if you look at Fox Business or Fox News (and to a great extent the other networks), the only news that matter is inflation, immigration, and increased criminality (the three “i”s I called it). Issues that are not covered include Ukraine, Trump's deranged statements, world affairs (including the impact of global warming which has a hand in the three “i”s), and in politics, the Supreme Court, the plutocracy, and of course the shortcomings of general healthcare. Like Covid denialism, it appears as if today’s segment editors feel the need to cover the inadequacies and neurosis of a certain segment population at the expense of the rest.
What about the taxes on these increases.
If you pay 10% or so on purchase tax and you pay 25% or more on the increase in your wages then the true inflation number goes up and the pay increase goes down leaving a significant net difference.
That doesn't make sense unless the sales tax is new and/or somehow itself increased with inflation. Otherwise, it's all linear scaling. For example:
Old all-in price with 10% tax:
$10 + (0.10 * $10) = $11
Current all-in price (20% higher after inflation) with same 10% tax:
$12 + (0.10 * $12) = $13.20
Relationship between old all-in price and current all-in price:
($13.20 - $11) / $11 = 0.20, or an increase of 20%.
It does make sense for the wage portion, but correct on the price portion.
I still don't get what is being claimed here. If wages go up X% and prices go up X%, the existence of a sales tax in both scenarios does not change the picture. The purchaser was *always* going to have to pay the sales tax, and it was always going to be the same exact proportion of wages and prices, respectively.
Yes, but you don't get all X% of your wage increase. You get X% minus income taxes. And payroll taxes! I forgot about payroll taxes in my comment below, which aren't subject to the standard deduction so take another 7.65% off of that wage increase.
"so take another 7.65% off of that wage increase."
FFS, this is not how math works. The prior income *also* was subject to payroll taxes.
Now, if you are complaining that increases in income bumped people into higher tax brackets, ok, I guess that might be a marginal impact, but the fact that both old and new salaries are subject to fixed-rate taxes does not mean that an increase in salary of 20% is somehow less than an increase in salary of 20%.
OK, yes on the payroll taxes. I was sick, my brain wasn't working properly.
But the income tax part is still correct - a straight 20% increase in wages would not be a 20% increase in take-home, regardless of any tax bracket change or not, because of the standard deduction on the first $X of income on federal/state tax returns. If the 20% increase was referring to only the amount above the standard deduction (pointless to get into itemized deductions at this income level), then it could be disregarded as well because it would be a flat rate.
Definitely an overlooked aspect, even though for most people it's more like 6% sales tax and 12% income tax (the US median income falls in the 12% bracket).
Back of the envelope:
About 40% of that gross income is removed from taxation via the standard deduction, so about 60% of it would be taxed at 12% - so income taxes eat up 7.2% of the increase, meaning that a +20% wage inflation is really more like +18.5% take-home-pay inflation for the median individual. Compare that to 20% price inflation and yeah, people aren't keeping up.
Since sales taxes are proportion to price and there's no mirror of the income tax deduction on prices/sales taxes, there's no point in including that in the math above.
I forgot that payroll taxes eat up some of the entire wage increase, so it's reduced by a further 7.65%. This means that a 20% wage increase for the median income is only about a 17% increase in take-home pay. If prices went up by 20%, then the median wage earner that saw wages increase by 20% actually fell behind the price increase (117% to 120%).
Re: I forgot that payroll taxes eat up some of the entire wage increase
How so? It's not like people weren't paying those taxes before and now they suddenly are.
Yes, I derped yesterday. Disregard about the payroll taxes, the math works exactly the same as for any sales taxes since it applies to the full amount.
Except for those earning enough that their payroll taxes are capped, but who cares about them anyway?
I'm not disputing Kevin's stats on a macro level. But, my wages have certainly not gone up 20% in the last couple years. My wife's have actually gone down. And I don't mean because of adjustment for inflation, I mean literally have gone down because they stopped giving a stipend for teachers with masters degrees.
Also, people that are most likely to feel the impact of inflation are also likely to carry credit card debt. The increase in interest rates is a double whammy.
You're relying on a major (and false) assumption about people's income and spending, there, Kevin. Looks like 2023 saw credit card debt hit a record high. Someone making $40,000 a year doesn't take home $40,000 in their pockets, so if their expenses are $2000 higher than their available income, the 20% increase, even if it does apply equally to income and expenses, will mean they're taking on more debt than before.
If you have $30,000 and have to spend $40,000, a 20% increase in both means you have $36,000 and have to spend $48,000. You had a $10,000 gap before inflation and a $12,000 gap after.
The odds are that people forced to carry credit card debt are not getting the highest wage increases, either.
Couple that with low-information voters. I live in the Deep South. In 2022, Republicans here were running by saying they would be able to fix inflation if elected. But almost every single elected position in the state was already held by a Republican. If they could fix inflation, why didn't they do it already? If they couldn't, why run on it?
As a regular reader, I'd just like to point out that my wage did not go up over the cited time period.
¯\_(ツ)_/¯
Wage increases were concentrated among the lowest-paid workers during the pandemic. They don't vote, so their economic improvements don't do anything positive for politicians.
People in stable jobs that require a significant amount of training/education haven't seen much growth at all. My guess is that's the situation for most commenters here. Many people in that crowd got a nice reduction in costs during the pandemic - no commute, no lunches out. Now that many are being forced back to in-person work, they have to cover "new" costs in a higher price environment. That makes inflation seem even worse.
"Why is inflation such an intense issue? In round numbers, prices have gone up 20% since the start of the pandemic and wages have also gone up 20%. For most of us it's a wash."
This was discussed in an earlier thread. There are a lot of people who are not "most of us" in terms of getting caught up with inflation for several reasons: savers of cash for home/car purchase, non-indexed annuities, COLAs that don't accurately reflect the situation (e.g. urban, older), savings account low interest rates, etc. They are hurting and frustrated and - believe it or not - have friends and relatives that listen to, and sympathize with, their plight.
Interesting to see Kevin move from, "There's little inflation, look at my 2nd order trend line or cherry-picked data points" to "Yeah, there was a lot of inflation but everyone was made whole with wage increases, so no biggie". Democrats better not say the latter in 2024 or they'll get crushed.
It's weird. Kevin is almost always rational about policy but for some reason has hitched his wagon to inflation denial. It's clearly an obsession.
With low inflation for 30 years, people weren't used to prices going up all that much year over year. This led to two things:
1) People forgot how to be frugal, use coupons, buy generic, budget, cook for themselves. Now they want their brand name overly-priced pre-made foods, and they don't want to go back to taking a few minutes to put some stuff in a pot and stir.
2) Rapid price increases are a shock.
So we lost home economics and have sticker shock. Bad combo.
I think it's mainly the first (gasoline) and last (media). Because of those stupid gigantic glowing gas price signs, many people judge the state of the economy from whether it's gone up or down.
And the news blabbers never say inflation is "increasing" -- it's "skyrocketing" or "soaring." And when they want to open the nightly news with inflation, they park a camera crew and a reporter at a busy gas station and get some doofus to say, "It's crazy! It used to take me $30 to fill up my SUV (ed.: which, of course, was 5 years ago), and now it costs me 60!"
But then when wages go up, where do you send the camera crew? Nowhere, they might have the anchor mention it as a statistic that soars (or skyrockets) right over everyone's heads.
My spouse got a new job with more money. Had she stayed in her old job the yearly raise would not have kept up with inflation. So things became tighter. We saw no 20% rise in wages, hers was a 3% for 2022-2023.
I do not see what is so hard to understand.
There are losers and winners. Some people stay ahead of inflation, some fall behind. Both groups are included in the average.
"...wages have also gone up 20% ..."
My wages haven't gone up 20%, more like 10% (and even less after taxes). And my pension hasn't gone up at all.
What state are you in that your tax rate increased?
"What state are you in that your tax rate increased?"
I am in New Jersey but I am talking about federal taxes. Because my marginal tax rate is higher than my average tax rate (this is normal in a progressive tax system) a 10% before tax raise will increase my after tax income by less than 10%.
To make up some numbers suppose you earn $100,000 a year and pay $10,000 in federal income taxes. Suppose your marginal rate is 20%. This is higher than your 10% average rate so your after tax income won't increase as fast as your pretax income. Say you get a $10,000 raise. Then your pretax income will increase by 10% (since $10,000 is 10% of $100,000). But your after tax income will only increase by $6,000 (since your marginal rate is 40%). So your after tax income goes from $90,000 to $96,000 an increase of only 6.7%.
After writing the above I belatedly remembered that federal tax brackets are adjusted for inflation. This may eliminate this effect on the federal level but of course people can get upset about things that aren't actually hurting them. Anyway it appears New Jersey doesn't adjust its income tax for inflation so I falling a little behind in after tax dollars.
During general inflation, the price of labor increases with everything else. There is no such thing as price inflation that doesn't include the price of labor.
General populations absolutely hating inflation bursts - is a general phenomena, across different media and cultural settings. Blaming US media specifically as a factor is without doubt misplaced as the same reactions arise in controlled media markets where inflation is only reluctanty acknowledged.
People hate bursts of inflation off of expected baseline. Period. Clearly there are probably multiple and probably deep pyschologial anchors although daily spending experience againt inexact memory, an anchoring effect, is a large one.
That is why again and again I commented that the comfortable urban and urbane professional class dominated Left poo-pooing of inflation evident (denials, excessive "transitory" etc) here and with Drum since it began was an enormous political error in reaction terms. Bad politics particularly out of touch with how fixed income and wage earning classes react to inflationary bursts (everywhere, and always, not just in USA and not just re Democrats).
Rather than denialism you should have gotten behind inflationary reduction policy (effective or not) and be seen as forefront.
What else?
The most commonly reported numbers exclude food and energy, which seem to have increased more than 20%. So, regardless of reported inflation, most people are seeing much higher inflation than wage increases.
What else?
Inflation destroys the value of cash and fixed-rate investments. This can be accommodated by inflation-adjusted interest rates, but it takes time. In the meantime, people see the value of their assets decrease. Once the adjustment takes effect, people have to pay taxes on the "income" that comes from the higher interest they earn, so they still come out behind.
What else?
In a world of progressive income taxes, higher nominal earnings means higher percentages of income going to taxes, so a further decrease in real earnings. This is a small effect for federal rates, which are indexed to inflation, but I don't think this applies to most state income taxes.
What else?
People living on private-sector pensions (a shrinking number, but still significant) generally don't get cost of living adjustments, so those retirees see their real incomes decrease. Retirees living on savings (including IRAs and 401(k)s), often have significant portions of their savings invested in bonds or other fixed-return assets. The real returns on these assets drop, and the value also drops.
What else?
In blue states, at least, most public employees have cost of living adjustments that automatically increase their pay due to inflation. This increases the tax burden on taxpayers.
What else?
Many people can remember the US inflation of the 1970s, which was generally not benign. Seeing inflation numbers rise to 7 or 8 percent is alarming to such people, or to other people who talk to the ones who remember.
Of course, there are winners from inflation. Homeowners who have 30-year fixed mortgages see the real value of their mortgage payments drop due to inflation. On the other had, higher inflation generally means higher interest rates, which depresses house prices. I'm not sure how many people draw a direct line from higher inflation to decreased value of their principal asset.